The Great Recession was a big test for Kinder Morgan Energy Partners. As the U.S. economy slowed, the company’s revenue from its network of pipelines fell too. Cash flow from operations bottomed at $518 million in the first quarter of 2011. Since then the rebound has been extremely strong with cash flow from operations climbing to $1.25 billion in the second quarter of 2011 to $1.98 billion in the third quarter to $2.87 billion in the fourth quarter.
That’s let the company raise dividend payouts from $538 million in the first quarter of 2011 to $2.24 billion in the fourth quarter of 2011.
Great but investors need to ask not just what have you done for me lately but also what will you do for me tomorrow.
Master limited partnerships make their money by borrowing (since they pay out most of their net income they don’t have a lot of retained earnings to re-invest) and then using that borrowed cash to invest in assets with a rate of return above what they’ve paying on the money they’ve borrowed.
The challenge right now isn’t borrowing cheaply—for a company like Kinder Morgan Partners money is cheap and plentiful—but finding enough new projects with high enough potential returns.
That’s where the proposed acquisition of El Paso (EP) by Kinder Morgan (KMI), which acts as general partner for Kinder Morgan Energy Partners. If the deal goes through, and I think it will despite an attempt by some shareholders to stay the March 6 vote, Kinder Morgan would be able to drop El Paso pipeline assets down to the Kinder Morgan Energy Partners master limited partnership (in return for cash, of course.) That growth pathway would increase the earning assets at the master limited partnership and enable Kinder Morgan Energy Partners to increase distributions by about 6% a year, Morningstar calculates. (Without the El Paso deal and those assets, Morningstar puts the annual increase at a not to shabby 4%.)
Kinder Morgan Energy Partners currently pays a 5.1% dividend.
You are correct in most of these assumptions. The drop-downs will be split between KMP and EPB, perhaps not equally but I expect these two MLPs to be combined in the future. The merger will probably fly and be immediately accretive to earnings. Even without it KMP will pay $5.00 per share next year. This is one of those "sleep-at-night stocks."